Managed float: Step in the right direction

13 Mar, 2020 - 00:03 0 Views
Managed float: Step  in the right direction The managed floating exchange if managed consistently will eventually lead to a stable exchange rate

eBusiness Weekly

Elias Pacheso
Zimbabwe’s road to economic recovery has been a thorny one, particularly for the ordinary person on the street. For most economists it’s been like a puzzle with a missing piece. No matter how hard you try you can’t complete the puzzle. I don’t get impressed easily but this week I found myself acknowledging some of the work being done to introduce currency stability in our country. The road has not always been clear and we have often backtracked on key policy measures. I am hoping that this will be a thing of the past.

We will continue with our sectoral analysis next week, assuming nothing new comes up. While the market had been expecting a major announcement this week from the Ministry of Finance and Economic Development few imagined the Government would take this move. However, the writing was on the wall as the unofficial market rate continued shooting, an indication of increased demand amid limited supply of foreign currency.

While opinions are varied when it comes to the various prescriptions on what needs to be applied to get the economy on track, I will be the first to admit that the managed floating exchange if managed consistently will eventually lead to a stable exchange rate.  Last week we covered the agriculture sector and the role it plays in the economy and it was my intention this week to cover the role played by the mining sector this week, but “managed float” debate came up! It is a hot debate!

What does it really mean? A managed float exchange rate is usually the precursor to a floating exchange rate and works on the strength that the central bank intervenes in the market from time to time to inject dollars or mop dollars in order to keep demand and supply in check so that a desired exchange rate is maintained. This has caused a lot of debate among economists and ordinary observers and for good reason. Some of the key questions are

Does Zimbabwe now have significant currency reserves to support its currency? What will happen to inflation if the exchange rate moves again as it has done over the last few days? If it does where will the Government get the dollars to inject in the market to support a market rate? These are not easy questions at all and asking them does raise important issues that must be addressed over the next coming days by authorities if the managed float framework is to hold. The biggest issue is confidence and transparency in any market driven or partially managed system. If the market is transparent enough and more importantly if when a company approaches the market to purchase currency at a price that is deemed fair by the seller and deals happen, the market will be validated and indeed we will see an efficient and stable market.

However, if by next week the market does not appear to be transparent enough, momentum will be lost. I am hoping that the right actions are taken to allow the market to find its level. One of the issues repeatedly raised by the market and for good reason too is the all too important issue of money supply growth.

Even the IMF has taken notice of this! As the Government moves towards restoration of market forces in the economy policy makers must be aware that statistics do not lie. Any market system must work on the strength of efficient allocation of resources. If there is limited supply of foreign currency it can’t be hidden forever and prices tend to reflect that.

With the foreign currency trading platform in place and supporting mechanisms fully functional, focus must return to ensuring that the country is productive and avoids at all costs inefficient use of resources. This takes us back to the important issue of food and fuel imports.

What has been lacking for a long time in Zimbabwe is a transparent formal way of determining the rate up or down. This problem has plagued the nation for more than three decades, causing headaches for businesses who cannot plan and are at the mercy of black market dealers. The consumer ended up suffering as prices of basic goods and services continued to shoot up. The consumer should be the ultimate winner in any painful economic reform journey. With a responsive exchange rate in place, exporters and importers alike can plan ahead and hedge against expected movements with a degree of certainty something which has been lacking in our economy for a long time. If as a user of foreign currency I can approach the market and get the currency at price reflective of demand and supply, I can invest in my business and confidently expect to get a decent return. The removal of arbitrage opportunities is next! A market where such opportunities exist is unhealthy and promotes rent-seeking behaviour.

A casual look at the current interest rate regime this week shows that the cost of money is indeed rising. However, for this tool to be effective cost of money must rise for everyone, Government included if we are to send the correct signals to market players. I am hopeful that at its March Monetary Policy Committee meeting, the committee will be alive to this fact.

Until then all my hopes remain pinned on the managed float framework. The efficient allocation of scarce resources is key to rebuilding confidence in the economy. It cannot be an overnight affair but we must build on the key pillars of a functional monetary policy regime that supports the preservation of spending power in the economy.

Pacheso is an experienced economist with more than 18 years experience in the financial services sector. He enjoys mentoring startups in his spare time.

 

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